Let Equipment Financing Remove the Need to Juggle Asset-Acquisition Needs

Business.com / Financial Solutions / Last Modified: August 22, 2017
Photo credit: Tashatuvango/Shutterstock

A sale leaseback and lease financing can represent new possibilities to grow your company's sales and profits.

Equipment financing provides a solid solution for companies requiring new assets and technology. One way to achieve cash flow nirvana is to refinance assets you already own under a sale leaseback strategy. Let's explore this option further.

Simply speaking, with a sale leaseback, you use unencumbered assets in your business to generate additional cash flow. Besides an injection of cash flow, in some cases, this financing method can enhance your financial statement metrics. There are also potentially positive impacts on taxation and profits for your firm. Talk about a win-win.

Let's review more about the motivations behind considering the strategy. Your firm is, of course, in business to earn a profit. When you take debt off your balance sheet, profits become greater, because they are a larger percentage of your total assets.  

The arithmetic is quite simple: your earnings divided by your asset base – when assets are taken off your balance sheet by the sale leaseback (Remember, you have sold the equipment to the lease company, but you still use the asset) your ROA (return on assets) is magnified. That's a good thing!

What is another motivator to consider such a transaction? If you have traditional bank lines of credit and term loans, attached to those arrangements are the covenants, or promises, you made to the lender with respect to certain ratios of debt and operating ability. Many of these ratios improve once you have completed your sale leaseback, because debt has gone off your books.

There are two essential types of business equipment financing in the leasing world: capital leases and operating leases. A capital lease involves a lessee temporarily renting business equipment. When the lease period is over, the lessor agrees to transfer ownership rights to the lessee. An operating lease is generally utilized by firms that have a bit more financial sophistication. You don't own the asset, but you are using it for economic benefit. You probably don't ever intend or desire to own the asset.

So how does this information relate to our sale leaseback strategy?

Cash your company receives from a sale leaseback is new cash that you will hopefully invest in other growth opportunities for your firm. In some cases, you can refinance old loans at a better rate, which is also financially advantageous.

In lease financing, your ability to properly control and minimize cash outflow is what asset financing/refinancing is all about!

In summary, sale leaseback strategies, while specialized, can be powerful, if you are looking for additional cash flow, have balance sheet issues, or concerns about asset obsolescence and replacement. Seek out and speak to a trusted credible and experienced business financing advisor.

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